HUGO DUNCAN: The British tax system isn't fit for purpose

A fair trade? Companies such as Starbucks pay almost no tax at all while small start-ups are hammered

Britain’s tax system is not fit for purpose. Companies such as Starbucks pay almost no tax at all while small start-ups are hammered. The rich and famous shelter their money from the taxman through elaborate avoidance schemes while everyone else pays up hand over fist.

An overhaul is long-overdue. The guiding principle must be taxation which is low, simple and compulsory rather than the dog’s breakfast we have at the moment.

But reform requires more than just chasing the tax dodgers and closing the loopholes.

It needs a new approach altogether because Britain is a grossly over-taxed country. Quite simply, a wasteful state takes far too much of our hard-earned money. And it is workers who bear the brunt of the pain.

The Treasury’s own figures show just how much the tax take is going up. Income tax receipts are forecast to rise by a third in five years from £155bn this year to £205bn in 2016-17. National Insurance Contributions – a tax on employers and employees alike – are set to increase from £106bn to £133bn.

George Osborne claims to be ‘a low tax, small government Conservative’. These figures suggest otherwise, even taking into account the expected increases in wages and the number of people in work. Britain is in a global race and our tax system is holding back the economic growth and wealth creation needed to pay for our public services.

The Chancellor has moved to ease the burden on firms but could go further still. Precious little, however, has been done to help the majority of workers who fund Britain’s bloated state.

To a certain degree, the political battle lines are drawn, thanks to the planned cut in the top rate of income tax from 50p to 45p in April next year. Ed Miliband argues it is ‘a tax cut for millionaires’ and amounts to David Cameron ‘writing a cheque for £40,000 to each and every millionaire in Britain’ year after year.

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This is of course nonsense. If it were true, the millionaire leader of the Labour Party would be on the receiving end of such a cheque along with the Prime Minister and much of his Cabinet.

But it also betrays Labour’s tax and spend tendencies and the pernicious belief that the state has the right to take as much tax as it pleases and do with it what it will.

At the Tory conference last month, the Prime Minister hit back: ‘Ed, let me explain to you how it works,’ he said. ‘When people earn money, it’s their money. Not the government’s money: their money. Then, the government takes some of it away in tax. So, if we cut taxes, we’re not giving them money – we’re taking less of it away. OK?’

This chimes with the belief that the state should only take what it absolutely needs to care for the vulnerable, treat the sick, educate the young, and protect our streets and borders.

The government has made some progress, not only cutting the 50p rate, but also raising the threshold at which workers start paying income tax towards £10,000.

But a personal allowance of £10,000 remains too low – and tax rates for all workers too high, particularly once NI is included.

Another serious problem is that more and more people who can hardly be described as rich are paying the 40p rate of tax. It currently hits those earning £42,475 a year but next year the threshold falls to £41,450.

According to the Institute for Fiscal Studies, the number of higher-rate taxpayers will increase from 3.7m in 2011 to 5m by 2014. Some 15 per cent of workers will pay the higher rate in 2013, compared to 5 per cent in the late 1980s.

As IFS director Paul Johnson says, it would be useful to know if the Chancellor has a view as to what proportion of taxpayers should be paying the higher rate.

Osborne is now coming under pressure from backbenchers to live up to his promise to help the nation’s ‘strivers’ amid fears the tax system discourages enterprise and hard work.

A report by Tory MPs Kwasi Kwarteng and Priti Patel published this week argues that only those paid over £50,000 a year should fall into the 40 per cent tax band. The tax cut, they claim, would be worth around £3.4bn a year.

Tax rates also need looking at. A reduction from 20p to 19p would cost £4.5bn and leave more cash in the hands of the millions who work for a living.

The tax avoiders need pursuing. But if the economy is to recover and compete globally then the tax burden on firms and workers needs lifting. If spending cuts are required to fund the changes, so be it.

‘Our country’s problem is not that working people pay too little tax, it’s that the government spends too much of their money.’

So said the Chancellor last month. In the Autumn Statement next month, he should do something about it.